The sentiment of Indian equity market can revamp when the domestic economy improves by the second half of the fiscal year subject to the development of monsoon, ease in oil prices and start of post-election business activities.
The sentiment of Indian equity market can revamp when the domestic economy improves by the second half of the fiscal year subject to the development of monsoon, ease in oil prices and start of post-election business activities. At the same time, global market also needs to improve, led by reduction in interest rates & quantitative easing measures as indicated by key world central banks. In India, the RBI has lowered its policy interest rate by 25 bps to 5.75% in its June policy meet and changed its monetary policy stance to “accommodative” from “neutral”. This was the third straight interest rate cut so far this year due to concerns about the sharp slowdown in investment activity along with a continuing moderation in private consumption growth.
The economy grew by 5.8% in the fourth quarter of FY19, the slowest pace in more than four years. Accordingly, the RBI lowered its growth forecast to 7% for FY20 from the previous estimate of 7.2%. And marginally raised its retail inflation (CPI) for the first half of FY20 to a range of 3% to 3.1% from a range of 2.9% to 3%. Consensus is that RBI is going to cut interest rate again in the two-day policy meet starting on the 7th of August 2019 by 25 bps to 5.50%. This is due to continuous moderation in economic growth and risk of further downside in forecast. FM is looking for significant ease in interest rate to spur economic growth.
A change in the sentiment of FIIs towards India due to increase in tax & lack of earnings growth in corporate, inching the valuation to peak high is impacting the market especially in the last one month. FIIs have sold about Rs 17,500 crore in the last 3 months. While DIIs have been positive and bought about Rs 25,800 crore of net equity asset during the same time. In spite of the supplementary support by DIIs, it has changed the momentum of the market given the impetus of FII selling, supply from other investors like retails and reduction in liquidity multiplying the effect of selling.
In the last one-year, the worst performing stocks were the companies that lacked worthwhile business model, sectors or businesses under transition or in disruptive phase. This negative trend multiplied as the domestic economy weakened and liquidity in the system dried-up. Today the sentiment of the whole market has weakened, even quality names have started to consolidate which could be the last phase of the consolidation. This phase could be shorter or longer depending on the new measures and protective actions initiated by the domestic and global government.
For a facelift in the market, the economy has to revamp and valuation has to rationalize which could take a combination of time and price correction. Currently valuation of many mid & small caps is below the long-term trend and can be considered in SIP method for long-term gains, but please stick with good names and businesses. The sectors which have attractive outlook in the future are Private & Rural Banking, Cement, Infrastructure EPC, Chemicals, Aviation and Consumer.
(The article has been authored by Vinod Nair, Head of Research, Geojit Financial Services. The views expressed are authors’ own)